updated 5/17/2010 11:38:19 AM ET 2010-05-17T15:38:19

The action flick "2012" starts with a back story of a scientist checking and rechecking his calculations, trying to find the mistake in the analysis that shows the world is on the verge of ending. Surely there has to be a mistake in there, or the implications are just too scary.

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That’s pretty much how it was with the market’s vertiginous May 6 plunge. As the event was unfolding, television commentators insisted that it was all a dream, a big, fat finger hitting the wrong key. Maybe a wrong decimal point in an order to sell Procter & Gamble (PG). A “b” instead of an “m” causing a sell order for billions of shares instead of millions. Surely — as in the movie — there had to be a mistake.

Wacko as some of the theories were, the impetus to search desperately for a mistake is understandable. Much better to find a flaw in the math or a problem with the computers than to confront the far more troubling possibility that fear and greed worked exactly as they have always worked, except that their effects were amplified by a jittery and fast-moving marketplace. That’s what we have to confront now.

What happened on May 6 now seems less and less like a mistake than something simpler and scarier: a panic. As Henry Blodget wrote in one of the few cogent explanations of the plunge, “people stopped buying stocks.” The stampede in the market was an anomaly, but it had no more to do with technical errors than the stampede of the bulls at Pamplona.

The closest thing to a proximate cause for the panic that we have is a single large order to sell index futures. Reuters identified the firm responsible for that order — cited, but not named, by Commodity Futures Trading Commission chief Gary Gensler in Congressional hearings as a contributing factor in the plunge — as Chicago asset manager Waddell & Reed .

The focus on Waddell & Reed is a natural one for journalists grasping at any straw to explain the plunge in terms of a simple chain of causes — one that can somehow be avoided in the future. The last week has demolished the initial theory that it was all the result of a simple error. If anything, the Waddell news puts the last nail in the coffin of that theory: Nobody is claiming that Waddell’s big sell order was some kind of data-entry mistake. But having to abandon the “fat finger mistake” theory, the professional observers of the market want at least to cling to the notion that everything that happened can at least be traced to one market participant.

Well, nice try. Here is what will happen in the next week: Just as the silly fat-finger theory was swiftly deposed by more information, so the new Waddell theory will be as well. Yes, probably Waddell’s big trade was a meaningful contributor to the plunge. Was it the single most important cause? Almost certainly not. The order seems to have preceded the fall by a crucial few minutes, and large as it was, accounted for only a small fraction of the panic-level volume.

There is one satisfying part to the Waddell explanation, though, for observers of the economic scene: It is fitting that folks should be looking for the big culprit in the plunge in Chicago. The University of Chicago is the home base of the long popular theory that the stock market is “efficient” and stock prices reflect a rational analysis of all the available information.

In case we needed any more evidence that’s just not true, the Great Intraday Plunge of May 6 is certainly providing it. Folks will try to use the Waddell story to explain the plunge, but count on this: We’ll never be able to trace the cause of a stampede to the misstep of a single excited bull.

Copyright Washington Post.Newsweek Interactive


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